Family-owned businesses are the backbone of the U.S. economy, yet only about 30 percent survive through the second generation, according to the Small Business Association.

Small businesses can be hard to maintain. Often, founders let emotions, family dynamics, and concerns about fairness guide their business decisions.

While those factors are important, they can lead business owners to make choices that are not optimal for the future of their business — or their own financial portfolios. “What is in the best interest of the business should be the first priority, because the business may solely be what supports your family and your employees,” says Baker Crow, Senior Vice President of Regions Private Wealth Management.

One key decision to make is whether to keep the business family owned. If you are passing it to the next generation, how can you effectively transfer assets to your successors? Or, if you planning to sell, what type of buyer will you look for? No matter what the exact plan is, emotions are bound to come up.

To avoid emotions, a first step may be having conversations with family members about the future of the business and then weighing each option to determine the best course. Here’s a look at three common options for divesting a business and key considerations:

Give the Business to Family

If there’s a family member interested in running your business, you may like the idea of passing it along as an outright gift. This strategy works only if you don’t mind paying the taxes on that gift. The IRS requires a third-party valuation by a qualified appraiser. If the business is worth more than a certain amount, the business owner will likely pay gift or estate taxes. The exact amount depends on how you structure the handoff, so talk to your banker and attorney about your options. For instance, married couples may decide to give a split gift, which increases the amount you can gift.

Another popular option is to create a grantor retained annuity trust (GRAT). By placing the business in a trust, owners may be able to customize how the business is gifted to family and come up with a strategy to minimize the tax obligation of a transfer. The IRS has strict guidelines regarding these trusts, so talk with your attorney and accountant to see if the strategy would work for your business.

Sell the Business to Family

Even if you are ready to retire, you may not have the financial resources you need to walk away from your business and the income it generates. A happy medium between giving the business to your children and selling it to a third party can be selling it to your children. Family members maintain control while you receive extra cash for retirement.

There are some caveats. First, can they afford to buy it? If not, you could take back a note — essentially an “IOU” — and they could pay you back over time, says Crow. This only works, however, if the business generates enough cash flow to cover that payment and still provides sufficient income to the new owners. “Also, do you want your future security dependent upon their ability to manage the business and pay you back?” Crow asks. If the answer is “no,” they will have to find outside financing, such as a bank loan.

If your family is already involved in the business as employees, you may also consider establishing an employee stock option plan (ESOP), where they are given a percentage of their salary as equity or shares in the business.

Selling a business can generate hefty capital gains for the seller. To minimize your tax burden, you might consider setting up a charitable remainder trust (CRT). With this strategy, you would transfer the business into the trust, and your children would buy it from there. You and your spouse can draw a lifetime income from the trust, either as a fixed annual amount or as a percentage of its total assets. The disadvantage of this strategy is that after you and your spouse pass away, the remainder of the trust automatically goes to a charity of your choosing, not to your heirs — which is why there are no capital gains taxes owed when it is initially set up.

Sell the Business to a Third Party

From a strictly financial perspective, you may receive a higher price by selling your business to a nonfamily buyer, such as a competitor, private equity investors or even non-family employees. This is a good option if you don’t have any children interested in taking over or if you have trusted employees who want to buy it. It may even be a helpful strategy for keeping peace in the family. “If you have four children and only one of them is working in the business, it is very hard to be equitable because the other children’s interests may not be aligned with those of the business,” says Crow.

Before heading down that road, it’s important to have a good idea of what your business is worth and realistic expectations of your family’s future financial needs. It’s a good time to bring in your attorney, your accountant, and your Regions Wealth Advisor, as they can help you determine if you can get what you need out of it or if you should stay longer and grow the business more.

Whether you gift or sell your business — and whether it stays in the family or not — can have a significant impact on your family’s long-term financial security. “This is not an easy decision, or a decision to be made quickly,” says Crow. “You should create a business succession plan many, many years beforehand.”

This information is general in nature and is not intended to be legal, tax, or financial advice. Although Regions believes this information to be accurate, it cannot ensure that it will remain up to date. Statements or opinions of individuals referenced herein are their own—not Regions'. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rules. Regions, the Regions logo, and the LifeGreen bike are registered trademarks of Regions Bank. The LifeGreen color is a trademark of Regions Bank.

We hope to see you again soon!

And You're Off.

You’re about to leave Regions to use an external site.

Regions provides links to other websites merely and strictly for your convenience. The site that you are entering is operated or controlled by a third party that is unaffiliated with Regions. Regions does not monitor the linked website and has no responsibility whatsoever for or control over the content, services or products provided on the linked website. The privacy policies and security at the linked website may differ from Regions’ privacy and security policies and procedures. You should consult privacy disclosures at the linked website for further information.